Thursday, June 11, 2009

Today's RH Donnelley CDS auction closed at an abysmal 4.875 final price (on top of the IMM). When will DTCC/JPM change the default recovery on bonds for the CDSW calc from 40 to 10? Why 10% - because, as the chart below demonstrates, that is what the weighted average CDS auction recovery has been for the past 8 months. Granted it is weighted a little low due to Lehman's significant weight in determining this outcome, but even excluding Lehman, the average recovery is still grossly atrocious (not sure if that is an ISDA-accepted technical term). Hopefully all hedge funds, foaming in the mouth for high yield bonds as the hot potato game shifts from equities to HY, soon realize that it is safe to say that within 2 years this is exactly the kind of recoveries they will be looking at (and at best 3-4 coupon payments). Maybe take advantage of those greater fools while they are still willing to pay par-plus for 10x leverage monstrosities.

Today's RH Donnelley CDS auction closed at an abysmal 4.875 final price (on top of the IMM). When will DTCC/JPM change the default recovery on bonds for the CDSW calc from 40 to 10? Why 10% - because, as the chart below demonstrates, that is what the weighted average CDS auction recovery has been for the past 8 months. Granted it is weighted a little low due to Lehman's significant weight in determining this outcome, but even excluding Lehman, the average recovery is still grossly atrocious (not sure if that is an ISDA-accepted technical term). Hopefully all hedge funds, foaming in the mouth for high yield bonds as the hot potato game shifts from equities to HY, soon realize that it is safe to say that within 2 years this is exactly the kind of recoveries they will be looking at (and at best 3-4 coupon payments). Maybe take advantage of those greater fools while they are still willing to pay par-plus for 10x leverage monstrosities.